Just Another Plunge For Bitcoin - A 25% Plunge

The price of bitcoin plunged by as much
as 25% on Tuesday amid concerns about tighter regulation, with the
volatile virtual currency dropping below $11,000 for the first time since early
December.

By late in the day in New York, bitcoin
traded at $10,370, according to data provided by Coindesk.com—down 48%
from its peak of $19,783 last month.

Bitcoin prices surged to records late
last year as traders prepared for the launch
of futures contracts on Cboe Global
MarketsCBOE 1.37% and
CME Group. Contracts trading on the
Cboe are scheduled to expire Wednesday for the first time since they
launched, a process that can lead to more volatile trading.

The spot contract expiring Wednesday
was slightly below the spot price of bitcoin. Futures trading at a lower price
than their underlying asset—known as backwardation—can be a bearish sign for an
asset. Spot and futures prices tend to converge as the expiration date arrives.

As bitcoin has emerged from the
underground world of nerds and criminals to become a mainstream investment, the
risk of hacks and scandals has also blossomed. What's a government to do? The
WSJ's Steven Russolillo travels the world (sort of) to see how regulators are
responding to the remarkable rise of cryptocurrencies. Video: Sharon Shi and
Crystal Tai

Bitcoin is a virtual currency, but very
few people use it to actually pay for things because of transaction fees and
its rising value. WSJ's Thomas Di Fonzo takes to the streets of New York to try
to spend bitcoin at brick-and-mortar establishments.

“This has clearly rattled investors.
And understandably so,” said Kerrie Walsh, assistant economist at Capital
Economics. “The more widespread bitcoin becomes, the more likely it is that
stricter regulations will be enforced.”

“Any scheme that reduces the anonymity
of bitcoin transactions could strip away much of the cryptocurrency’s appeal,”
Ms. Walsh added.

However, volumes in bitcoin futures
have continued to rise, according to Cboe, with open interest in January
futures declining by less than 7% from their highs, and activity in February
and March futures rising.

Sharp
moves like Tuesday’s fall aren’t unusual for bitcoin, with the currency
dropping as much as 30% between the 16th and 22nd of December and falling by as
much as 25% in mid-November.

Other cryptocurrencies also
tumbled Tuesday, with ether, the second largest by market share after
bitcoin, falling as much as 23%.

Other rival currencies, including
ripple and bitcoin cash, fell by about 18% and 10% respectively at their lowest
points, according to data from CryptoCompare.

Bitcoin’s share of the market for virtual
currencies has declined, boosting “altcoins” such as ethereum, ripple and
litecoin.

“Bitcoin’s market share continues to
drop, with a potentially unlimited number of other cryptocurrencies available,
increasing the risk of a price collapse,” said Mark Haefele, UBS Wealth
Management’s global chief investment officer.

Not all analysts and investors see a
grim future for cryptocurrencies.

The rapid rise of transaction fees,
driven by the limited number of trades that can be processed each second, has discouraged
some investors from moving into the market, according to David Coker, lecturer
in accounting, finance and governance at Westminster Business School.

“When people have dumped bitcoin they
might well have come back in, but people who have put in a hundred or two
hundred bucks are dissuaded because those fees are too high,” Mr. Coker said.

Tweaks to the technology behind bitcoin like
Segregated Witness—an update which would allow more transactions a minute to be
processed—would reduce transaction fees and dampen market volatility, according
to Mr. Coker. “Over time, maybe a year out, you should see the volatility start
to decline.”